1. Field of the Invention
The present invention generally relates to financial systems for processing financial information and securing repayment of loans. More particularly, the present invention relates to method for structuring and utilizing mortgage-related financial instruments.
2. Related Art
Borrowers purchasing (single-family or multi-family) homes usually borrow funds from a lender (e.g., a bank, finance company or the like, who are also called “originators” or “lenders”). As is well known in the relevant art(s), the legal document by which the borrower uses the purchased property as security to guarantee repayment of the loan is known as a mortgage (or mortgage loan).
In order to have funds to meet additional demand for mortgages, lenders generate and liberate capital by selling the mortgages they originate into the secondary market, keeping the supply of money for housing more widely available and ultimately lowering costs to borrowers.
The majority of mortgages sold into the secondary market are sold directly or indirectly to the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National Mortgage Association (“Fannie Mae”) (each, an “Agency” or “Government Sponsored Enterprise (GSE)”), or to another market conduit. Often, these entities create securities, which in their most basic form, pass through the borrowers' payments to investors (such securities are referred to as “mortgage-backed pass-through securities”) and in the case of the GSE securities, the payments to the investors are guaranteed by the GSE for a fee (the “guarantee fee”).
The guarantee fee charged by the GSE in connection with the securities is priced based on the risk profile of the assets backing the security and is determined at the creation of the security. In a multi-family transaction, the risk profile of the assets is normally determined through an underwriting of the individual assets. After the risk profile is attained and the guarantee fee is set, the guarantee fee normally remains constant for the term of the security.
In those cases where the guarantor has been unable to ascertain the risk profile of the assets underlying the security, either due to limited information, insufficient history with the asset or originator, or because it would not be cost effective to underwrite each asset, it has been difficult to effectively price the risk and set a reliable guarantee fee.
To date, no mortgage backed pass through security exists which allows the price to be adjusted based on the performance of the underlying assets after the security has been issued.
Therefore, given the foregoing, what is needed is a method and computer program product for structuring mortgage-backed pass-through securities and using a credit guarantee contract that involves a “guarantee fee” or “premium” that varies with the realized performance of the underlying assets.